Are public companies sold too cheaply?

Takeovers of public companies make a lot of people happy. Shareholders can sell at a price that seemed out of reach, management gets new - and usually better - incentives or jumps ship thanks to generous golden parachutes. Investment Bankers make fat fees and all in all - thanks to supposed higher efficiencies created by the new owners - everyone is left better off.

Recently, however, some critics argued that buy-outs by Private Equity Investors have some less desirable aspects. In the US there is even a possibility that club-deals by several large buy-out firms may have restricted competition and allowed them to pick up companies for lower prices than would otherwise have been the case.

Other factors pushing companies into the hands of new owners are: managements that are promised cut-price equity stakes or benefit from golden parachutes and option schemes that pay out in the event of a takeover or stake building by investors that have no interest in the long-term future of the business.

We would argue that some simple adjustments to company law might make it possible that the public shareholders would get a higher price in successful takeover attempts. A limit to the number of shares that each holder can vote and a minimum holding period before shareholders can vote with their shares would limit the impact of stake building by hot money that is only to happy to sell out for a small profit.

Conflicts of Interest in Buy-out Vehicles

The booming demand for investing in 'Private' Equity funds allowed a few of the more prominent Buy-out firms to launch listed closed-end funds. One has to assume that the shares on offer were mostly bought by smaller institutions as well as retail investors that would otherwise not have been able to get into the funds that are launched by the major players in the industry.

Apart from the poor aftermarket performance of the shares (not surprisingly they now trade at a discount to net asset value) we are concerned about how large firms like KKR can manage the conflicts of interest if they continue to manage traditional funds that are mostly placed with their regular institutional investors.

The only fair method would be to allocate new holdings between the various funds under management, ideally pro-rata on the basis of the individual fund's total assets.